This has been a really bad month for picking a direction in the market because there has not been any direction. Triple digit declines are followed by triple digit gains which then reverse back into triple digit declines.
Since the beginning of March the market has reversed direction 12 times with triple digit moves at the turning points. We have been stopped out on nearly every strategy every time. I am starting to look for a high bridge as a possible permanent escape from this nightmare.
As every reader can attest it is very difficult to pick directional plays in a non-directional market. Hot sectors one week are crashing the next. Every 2-3 day market decline is followed by a monster short squeeze to stop everything out. Friday's spike on the payroll numbers took the indexes right to resistance in the first ten minutes of trading before volume died and gains ended.
The S&P has stalled almost exactly at the historic high resistance of 2117.69 multiple times. On Monday the intraday high was exactly that number before the selling began.
With the market that close to breaking out it is hard to pick bearish plays. However, with multiple failures at that level it is also hard to pick bullish plays.
While you can't tell it from the portfolio this month I spend a lot of time researching and picking plays. On Mondays I spend from 12-14 hours researching and writing and about 2 hours a day the rest of the week researching and taking notes on potential plays. The last two months have probably been the hardest period I can remember in recent years.
I think as newsletter writers we fall into the trap of "I have to pick something every time a newsletter goes out." That is not the right attitude for play selection but sending out a newsletter with no plays is frustrating for the readers.
This week everyone will just have to be frustrated. I want to take a pass today and let the May positions flush out of the portfolio and start over again next week. Nobody has a clue which way the market is going and maybe by next Monday it will pick a direction. If we do breakout to new highs it could be a strong move for several weeks because almost everyone is expecting the market to decline. Contrarian moves are usually the strongest BUT we can't bet on a contrary hunch in this portfolio.
If the market does decline it could also be a strong move since the sellers are likely to pile on once a real move begins and support levels begin to fail. I don't really care which direction the market chooses just as long as it stays directional for more than 3 days.
I am going to list some potential plays if you just have to have something to trade.
Send Jim an email
The fourth column in the portfolio graphic is the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description. For the plays where we will not exit I added the No-X designation in the portfolio.
Current Position Changes
KORS - Michael Kors (Stopped)
KORS spiked up at the opening short squeeze on Friday to stop us out of the short call for the second time. The stock has failed to cooperate for the last four weeks with a sideways trend and market produced spikes. The May $65 long call will likely expire worthless as expected.
Closed Short May $60 call, entry $4.60, exit $2.90, +1.70 gain.
Long may $65 call, entry $1.60, currently .05, -$1.55 loss.
Previously closed May $60 call, entry $4.35, exit $6.20, -1.85 loss
Net loss -1.70
BHP - BHP Billiton (Closed)
The long BHP call was stopped out on Thursday when oil prices crashed back from their highs. We still exited the busted play for a nice profit.
Closed Long May $45 call, entry $1.79, exit $5.10, +3.31 gain
Previously closed Short May $40 call, entry $5.25, exit $6.40, -1.15 loss
Net gain +$2.16
BIG - Big Lots (Prepare to close)
We are currently long a May $47.50 call on BIG and shares closed at $48.15 today. The call is currently profitable with four days until expiration. Watch this position and be prepared to close it on any weakness. I added a stop loss just in case. With any luck we could see BIG move higher and I would recommend closing it for a profit.
Long May $47.50 call, entry .85, currently .95, close on any spike.
Previously closed short May $45 call, entry $2.51, exit $2.75, -.24 loss.
WMT - Walmart (Close)
The leftover long call is not expected to gain in value before Friday but this is retail earnings week. I am recommending we close it at the open on Tuesday but you may want to hold it just in case the retailers show an unexpected surge in sales with their earnings. This could power Walmart higher.
Close long $May $79 call, entry .85, currently .18, -.67 loss
Previously closed short May $75 call, entry $3.45, exit $3.45, zero gain.
Net loss 67 cents.
BBY - Best Buy (Stopped)
Best Buy's 6 week downtrend reversed last week to stop us out at $36.25. The long $37 call is still open and BBY closed at $36.97. I added a stop loss at $36.75. I would watch this position in hopes of a continued move higher. With this being retail earnings week anything is possible. I would target $38 to exit on any move higher but be sure and close it before the week is over.
Long May $37 call, entry $1.03, currently .38, target $38 to close
Previously closed May $34 short call, entry $3.20, exit $2.58, +.62 gain.
LOW - Lowes (Stopped)
The Short May $70 call was stopped on Thursday for a breakeven. We are still long the May $75 call with LOW at $73.25. Watch the long call and the potential for a spike on the retail earnings.
Closed short May $70 call, entry $2.04, exit $2.03, +.01 gain
Previously closed May $70 call, entry $3.21, exit $4.07, -.86 loss.
Retain long May $75 call, entry $.49, currently .09, close on any spike.
LEN - Lennar (Stopped)
Lennar gapped higher on Friday on the positive job numbers and giant short squeeze. We were stopped out at the open. The long May $48 call is still open with LEN just below $47 but odds are good it will expire. Watch for any spike to close before Friday.
Closed May $45 call, entry $2.00, exit $2.49, -.49 loss.
Retain Long May $48 call, entry .34, currently .13, close on any spike.
RCL - Royal Caribbean (Stopped)
We were stopped out on Friday when the jobs numbers caused a major short squeeze. Investors also believed more jobs meant more cruise passengers. Also powering the stock higher was an order for a fourth Quantum class ship. Business must be good.
Closed May $67.50 call, entry $3.80, exit $4.30, -.50 loss.
Retain May $72.50 call, entry .90, currently .89, look for a continued move higher to exit.
LGF - Lions Gate Ent (Watch)
We are short the May $28 call on LGF and the stock closed at $30.56. Any decline will be directly reflected in the option price because we are in the money. The stock is in a down trend. I tightened the stop loss and I would suggest everyone monitor this position and close it on Friday if we are not stopped.
Short May $28 call, entry $3.21, currently $4.00, -.79 loss
Long May $31 call, entry $1.09, currently .31, will expire on any further decline.
APOL - Apollo Education (Watch)
We are short the May $14 call with APOL spiking to $17.25 and just under the stop loss. APOL has gone sideways to down for a month and on Friday spiked to $17.40. The stop loss is $17.45. Monitor the position for any decline and be ready to exit on or before Friday. The long $17 call is in the money but we want the short call to decline and that means the long call will also decline. Our biggest risk is the short call so watch it closely.
Short May $14 call, entry $2.73, currently $3.45, watch for decline to close for breakeven.
Long May $17 call, entry .66, currently .42, if short call is stopped watch to close the long call for a gain on or before Friday.
These are not official recommendations. They are potential plays that were on my list today and they could represent a good starting point for anyone daring enough to sell premium in this market.
June Bear Call Spreads
Sym Price Premium Short/Long Strike
APA $63.13 - $.41 - 67.5/$70.0
LVS $51.85 - $.37 - $55/$57.5
NOV $51.33 - $.38 - $55/$57.5
FEYE $41.88 - $.35 - $45/$47
TWTR $37.31 - $.36 - $40/$42
June Bull Put Spreads
Sym Price Premium Short/Long Strike
AEM $32.39 - $.43 - $30/$28
HAL $47.19 - $.32 - $44/$42
SWN $28.70 - $.28 - $26/$24
Sym Price Premium Short Strike
LL - $28.06 - $.77 - $25
GBX - $62.01 - $.95 - $55
GPRE - $31.81 - $.65 - $28
SPWR - $32.87 - $.53 - $30
New Covered Call Recommendations
New Aggressive Recommendations
New Long Term Recommendations
Existing Play Recommendations
Links to original play recommendation
BHI - Baker Hughes (Covered Call)
KORS - Michael Kors (Bear call Spread)
APOL - Apollo Education Group (Bear call Spread)
BHP - BHP Billiton (Bear call Spread)
LGF - Lions Gate Ent (Bear call Spread)
BBY - Best Buy (Bear call Spread)
BIG - Big Lots (Bear call Spread)
WMT - Walmart (Bear call Spread)
LOW - Lowes Co (Bear call Spread)
LEN - Lennar (Bear call Spread)
RCL - Royal Caribbean (Bear call Spread)
LOW - Lowes Co -reentry (Bear call Spread)
LGF - Lions Gate Ent - reentry (Bear call Spread)
NOW - ServiceNow (Bear call Spread)
PRLB - Proto Labs (Bear call Spread)
HAL - Halliburton (Short Put)
GBX - Greenbrier (Short Put)
There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.
Here is the most common margin calculation for naked puts.
100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))
For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.